Sixth Circuit Court Of Appeals Affirms Rights Of Lenders To Assigned Rents

Author:Ms Tamar Dolcourt, Ann Marie Uetz and Andrew T. McClain
Profession:Foley & Lardner

On June 15, 2018, the U.S. Court of Appeals for the Sixth Circuit affirmed a decision of the U.S. District Court for the Eastern District of Michigan, holding that rents collected by a receiver during the redemption period following a non-judicial foreclosure are property of the lender, even if the borrower ultimately redeems the property.1 In 2015, the lender obtained, over the borrower's objection, a receiver for a troubled mobile home park in the Detroit area. The property was foreclosed in 2016. Under Michigan's non-judicial foreclosure law, a borrower is entitled to redeem a commercial property for six months after the foreclosure sale. On the eve of the expiration of this period, the borrower redeemed the property by paying the redemption amount. The redemption payment left a deficiency of approximately $650,000 on the loan.

However, during the period in which the receiver was managing the property, the receiver collected significant rents and other proceeds, which the borrower argued were its property once the redemption occurred. The borrower filed a motion seeking the termination of the receiver and requesting that the court distribute all of the funds held by the receiver to itself. The lender objected to the motion, relying chiefly on the loan documents and Michigan's assignment of rents statute. After a hearing and supplemental briefing by both parties, the District Court entered an order denying the motion to distribute the funds to the borrower, finding that, among other things, the loan documents and Michigan law provided for an assignment of rents, which gave the lender an exclusive right to the rents collected up until the redemption of the property, and that the lender's ownership right in the rents was not affected by the redemption of the property. The borrower timely appealed.

In its opinion affirming the District Court's order, the Sixth Circuit found that its recent case In re Town Center Flats, LLC, 855 F.3d 721 (6th Cir. 2017) was applicable to this matter and, in fact, described exactly what should happen in this case. In Town Center, the Sixth Circuit determined...

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